Farming the future.
The landscape is shifting. The rolling green hills of Gippsland changed from temperate rainforest to prime agricultural land when Strzelecki roamed the country, and now we see rows and rows of houses cropping up en masse. Retained dirt lined up like crops in the field, housing estates are spreading far and wide, bleeding towns into each other and forever changing the viability of the region and the land. Since the 1840s, my family has toiled on the fertile land of Gippsland and called it home. Like all farmers, they have gone from one tight spot to the next; from years of drought through to pricing pressure from the likes of Murray Goulbourn, Coles and Woolworths, and the constant battle for finance. The rise of the urban housing estate in regional Gippsland provides an out for ageing farmers; as kids flock to the cities in search for work, it’s often easier to sell up and watch houses sprout on the once proud land than continue to toil in the rich, red dirt. The challenge for our future is managing the long term costs of selling prime agricultural land for short term, brick veneer gains.
The management of long term and short term costs and benefits is primarily a question of economics, and secondarily — but probably more importantly — a sustainability issue. Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It’s safe to say that somewhere along the line we’ve lost sight of the long term, the future generations, our legacy. We’ve become caught up in the economic competition for resources. The scarcity factor means that people will pay more to have land turned into housing than to have land turned in productivity, food and ultimately a future.
In reality, society is faced with a simple equation and an even simpler question. A growing population means more people, more mouths to feed and more houses; but if houses are replacing farms, where will we get food to feed the people?
Australian produce as a whole has one of the best reputations in the world for high quality and premium goods, especially for food and beverages. As a nation we currently command approximately 3% of the international food market, but we are faced with under-investment, domestic pricing issues, challenging seasons and poor town planning. Gippsland, like the Yarra Valley, Mornington Peninsula and Tasmania, has a reputation for first-class produce; so why is it that our farmers — the backbone of our community — are facing under-investment and no support. After significant research involving financial reports, regional strategic plans, agri-innovation, viability studies and all that boring stuff, we have identified seven ways to change this sad state of affairs.
- The Mega Trend
Macroeconomics and “mega trends” are a consequence of sweeping global demand for one industry, product or service. Think of the rise of smartphones, mining, China, the “dining boom” and the ageing population. Demographics are at the heart of macro-economic trends. It’s no coincidence that the greatest 50 years of economic growth in human history followed the greatest population boom on record — the baby boomers. Now it’s easy to think, “Yeah, but what does that have to do with me?” In reality, these macro trends impact every one of us, from what’s available at the supermarket to how it got there and where it came from, the whole supply chain is implicated.
Farmers can capitalise on macroeconomic trends. For example, the demand for reliable, safe and high quality food in Asia and Europe is significant. At home, we tend to forget that Mad Cow disease, soil contamination and poor water quality are significant issues that face the rest of the world, a world that is willing to pay for our safe produce. Exportation of goods can provide a more reliable market for small-medium farms, and avoid some of the pricing risk of competing domestically.
2. Niche and Artisan
Everyone knows that organic and gluten free have boomed in recent years. If you go for a quick walk to your local supermarket, you’ll most likely see health food and gluten free sections that didn’t exist a decade ago. The niche market is possibly the greatest market for Australian farmers and especially Gippsland farmers. Bloomberg, The Australian Financial Review and others have heralded 2017 as the year of the “Artisanal Butcher” and the year of steaks. Restaurants all over the world are becoming ‘experiential’; places that you not only go to eat delicious food but hear the story of the food and go on a delectable journey. People are demanding better quality food, better information about their food and more sustainable practices regarding the production of their food, and this demand is worth billions.
Think Wagyu, Organic, Biodynamic, Zero Waste, Nduja, Kobe beef, Randall Lineback steak, Integrated Farming, Sourced Locally and “Craft” anything. These are all examples of massive niche markets, but you don’t have to just think of steak and wine to be niche. Gippsland’s Loch Brewery and Distillery have brewed some first class gin that is now stocked at world class restaurants such as Noma and Attica in Melbourne.
The niche and artisan trends are about bringing love, narrative and humanity back to food, a story of paddock-to-plate, rather than a story of mass production. This is a movement that even the smallest of farmers can become a part of. Tapping this market is about finding a unique product, building the story around it and partnering with a local grocer, butcher and/or restaurant that can share that story with the public. Consider the feed, the breed and the practices of your farm.
The niche market has even given rise to the “blogging farm”. These farms pre-sell their meat to customers who purchase on the arrangement that the farmer uploads photos of the animal and details of the feed and care the animal receives. The customer gets the satisfaction of knowing how their food has come to be and the farmer gets a premium and increased cash flow.
There are so many options for going niche on either the local or global level. Anything is possible, whether you choose to partner with a restaurant in New York or Traralgon is entirely up to you. Maybe you’ll move your entire retail operation online. However you look at it, speciality farming methods and breeds are a viable way to grow your business.
3. Sustainability and Renewable
Sustainability and renewable energy are definitely catch cries of the current age. Sustainable farming practices very much fit into niche markets and mega trends. Sustainability is not only good for branding and marketing your produce but it’s good for the environment and continued profitability of a farm. We all know that we need to take care of the land if the land is to take care of us, but the fact of the matter is. Sustainable farming can increase crop output and productivity too, a win-win.
Sustainable farming practices have been thoroughly researched and information is freely available at community presentations (ie. BetterBeef), sustainable farming groups, the internet and the library. That being said, alternatives like hydroponic farming, micro-biodiversity, and integrated farming practices are great ways of growing your business.
Part of sustainability is also utilising renewable energies and developing closed loop farming practices. Madowla Park in Echuca is a canola farm that now produces its own biodiesel and food grade canola oil from their crop. Not only has this development created sustainable practices but it has created multiple revenue streams for Madowla Park whilst simultaneously reducing expenses in the form of a lower fuel bill. Not all farms can afford to build a biofuel plant, but they can afford to look at integrating other products into their output.
It’s all about creating multiple streams of revenue and reducing risk. As the climate becomes more volatile it becomes increasingly important for farms to avoid being reliant on a single income stream. Look at the big picture of your farm: see what goes in and what comes out, see what can be transformed or what you can bring in. Think companion crops, strategic breeds, and different species. Can free range chooks improve the soil quality and reduce pests and insect damage in your vineyards?
Diversifying revenue streams also applies to incorporating renewable energy. According to the Climate Council’s report On the frontline: Climate Change and Rural Communities, renewable energy sources such as wind farms can generate approximately $10,000 per year to the person whose land they are built on. Other options to reduce costs and potentially diversify revenue include solar panels, tree farming, capturing water run-off, utilising grey water and carbon farming.
At the end of the day, sustainability and renewable energy should be able to increase your profit margins, increase the longevity of your business and add to branding and marketability.
4. Technology
Sustainability, renewable, niche and mega trends are all built on the growth of technology. The global market for AgTech is expected to be around AUD$260 billion by 2022, which includes everything from remote farm monitoring and drones to farms on social media and big data. GPS and automation are going to be big for farming. The BBC is calling for driverless autonomous tractors and fully automated farms. Competing with automation is the human touch. For large farms with scale, automation will be useful, while for smaller farms it will be about the story they create and how they can incorporate technology.
In the Far North, farmers are experimenting with mustering via drones instead of helicopters and horses. Drones are also being trialled for monitoring livestock health, weight, available food and access to water.
Vertical farms, where fruit and vegetable are grown hydroponically in controlled environments, are beginning to appear all over the world. These hyper-efficient farms use recycled water, climate control and LED lights to grow row upon row of plants. These new farms vary in size from a humble shipping container to a warehouse. They can produce fruit and veg all year round, without a worry for climactic conditions.
Like the shift from horse-drawn plough to tractor, we are making a leap forward and there are ways to be a part of this tech revolution for free. Programs like SproutX are about developing AgTech in Australia, taking concepts from ideas to tangible products available for purchase. Government grants are also often available for the agricultural industry, and AgTech in particular.
When it comes to technology and the future of farming, awareness is key. We need to be aware that drones can be used to monitor livestock, and that live soil management sensors are available to assist in planning the future of a farm. If you decide that a range of new sensors that connect with big data will improve your efficiency, then consider how to incorporate them in your farm over a five-year plan.
5. Farm Business Structure
It’s often forgotten that farming is business ownership, and like any business, company structure will affect the ability to adopt new practices, new technologies or new strategic directions. The traditional farming structure is a sole trader: the farm’s income is the farmer’s income and the farmer owns the land he works.
A consequence of the sole trader model is that most farmers have all their wealth tied up in farm assets. The bank usually has a big role to play in the accumulation of these assets and meeting repayment obligations can be challenging with the small margins on which many modern farms operate. Further investment to increase productivity and improve margins is seemingly impossible under this arrangement, but there are ways around this.
The first to consider is a sale and leaseback. This is where the major asset of the farm — the land — is sold under an arrangement to be leased by the farmer. With this strategy, the farmer receives an injection of capital that can be used to invest in diversified revenue streams and to invest back into the productivity of the business. Remember that most businesses don’t own the buildings they operate in; there aren’t many cafés or shops that own the building they occupy, and a farm doesn’t have to be any different.
Not only may there be tax benefits to operating under a lease arrangement, but the investment into productivity can increase margins and/or output, which in turn improves profitability. These arrangements can be beneficial to the farmer in both the short and long term. A thirty-year lease arrangement may mean that more farm land remains productive instead of spawning housing estates, and both the investor and the farmer can reap those rewards.
The other strategy worth considering is cooperative sales agreements. This is where independent farmers come together to form a separate entity purely for the purpose for negotiating contracts. As individual little guys, it’s easy to be pressured and summarily screwed by the big competitors. As a collective (a little like a union), bargaining power goes up and so should the bottom line. It’s all about who has the upper hand. In reality, the big supermarkets wouldn’t have anything to sell without farmers, and farmers need to work together to ensure they capitalise on that fact.
6. Defying the Capital Shortfall
There’s more than one way to run a business; a company structure, for example, may be better if you want to defy the capital shortfall and get some private investment into your business. If Australia wants to maintain its current market share of global food produce into the future, we need to invest a further $109 billion by 2022. If we look at this from just a production point of view, that’s an extra $9.7 billion that needs to go into beef, $12.6 billion for dairy and $10 billion for grains, with the balance being made up under other farming infrastructure and products.
This gap really does demonstrate the current market conditions for farms and farmers in Australia. Thankfully, there’s a lot that can be done to remedy it. Shifting business structures from partnerships or sole traders into companies with governance can make it significantly easier for private equity to become a part of a farm. Private equity and offtake agreements can assist with achieving economies of scale through funding land acquisition or technological investment.
Most of all, to gain investment is to be vocal and opportunistic. Know your business, know your numbers and be willing to take a risk as there are huge numbers of foreign and domestic investors that are looking for good returns on their capital and are willing to invest in farms but don’t know where to start. Getting capital all starts by knowing the books and having a good plan in place.
7. Selling Up vs. Soldiering On
As we contemplate investment it’s easy to have the mind wander to everyone’s favourite investment — property. Property investment and farming definitely have a mixed relationship. As the average age of farmers nears 60, and retirement comes knocking on their doors, a question has to be asked whether to sell to property developers or to the next generation of farmers.
Let’s consider housing returns versus farms, considering capital gains and return on asset over the last 10 years. Since 2007 the median price for a house in Warragul has risen by 3.21% on an annualised basis. If we are comparing this investment to a farm, we have to assume that the house is producing an income, so it is rented out. The median annualised rental amount over that period is 4.43%. So if you were to invest in a run-of-the-mill property in Warragul in 2007 you would now have total returns of 7.64% — not a bad investment.
Now let’s compare this to a dairy farm in Gippsland. The median price per hectare over the same period rose by 4.2%. The average dairy farm had a return on assets during that period of 3.95% which is a total return of 8.15%. So maybe, just maybe, more of us should be investing in sustainability and in farming than in unsustainable housing growth. Why let this beautiful fertile land and rolling green hills of ours disappear into a world of concrete driveways?
The times are changing and our landscape is changing with it. There are opportunities everywhere in Gippsland and all we have to do is stop, listen and think. The big win right now often costs more in the long run. So when you go shopping next, think about where your food is coming from and if you can, shop small and shop local.
Disclaimer
The information contained in this article is information only and general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice.
